When Courts Step Back: What Delaware’s Earn Out Ruling Teaches About Modern Contract Law and Why Israel Is Moving the Same Way
In January 2026, the Delaware Supreme Court delivered a decision that quietly reshaped the boundaries of contract interpretation in complex commercial deals. In Johnson & Johnson v. Fortis Advisors LLC, the court vacated part of a record-breaking earn out damages award and sent a clear signal to dealmakers, litigators, and judges alike: when parties have clearly allocated risk in their agreement, courts should not step in to rebalance the deal after the fact.
The case arose from a merger agreement that included earn out milestones tied to a specific regulatory pathway. That pathway ultimately became unavailable. The seller argued that the buyer should have pursued an alternative regulatory route and that failing to do so breached the implied covenant of good faith and fair dealing. The Delaware Court of Chancery initially accepted that argument and imposed massive damages.
On appeal, the Supreme Court reversed course. It emphasized that the implied covenant is a narrow, gap-filling doctrine, not a tool for improving a bargain in hindsight. Where the agreement explicitly tied payment to a defined regulatory path, the risk that this path might fail was foreseeable and, crucially, already allocated. There was no contractual gap to fill. The court refused to impose obligations the parties could have negotiated but did not.
This is not a technical point. It reflects a deeper philosophy about contracts between sophisticated parties. Courts are increasingly reluctant to protect parties from bad outcomes when those outcomes flow from clear contractual choices. Freedom of contract cuts both ways.
This approach strongly aligns with Israel’s most recent amendment to the Contracts Law. The amendment reinforces a restrained judicial role in cases where the parties’ intent, allocation of risk, and commercial logic are clearly expressed in the agreement. While Israeli courts have traditionally shown a willingness to intervene on grounds of fairness or good faith, the legislative direction is now unmistakable. The contract itself is the primary source of rights and obligations, and implied duties should not override explicit arrangements.
Taken together, these developments reflect a broader international trend. Courts are signaling that sophisticated commercial actors are expected to draft for contingencies, including regulatory failure, market shifts, and operational obstacles. If a deal hinges on a specific trigger, milestone, or pathway, and no alternative is provided, courts are increasingly unwilling to invent one.
For practitioners, the implications are immediate and practical. Earn out clauses, efforts obligations, and regulatory covenants must be drafted with precision. If a seller expects the buyer to pursue alternative routes, fallback mechanisms, or “best efforts” under changing conditions, this must be stated expressly. Silence will usually be interpreted as acceptance of risk, not as an invitation for judicial creativity.
The lesson from Delaware and Israel is the same: modern contract law is moving away from paternalism and toward responsibility. The agreement is no longer just the starting point of the analysis. It is the end point.